TMI Blog2023 (8) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... ionment of rest amount of expenses under the heads other expenses excluding the sub-contracting expenses Rs. 135.61(189.84-54.23) crores should be divided as per the turnover of the segments of the assessee and the assessee is also agree for the apportionment on the basis of turnover. As under schedule No. 19 Other expenses we did not find separate employee benefit expenses, each head of expenses have been characterized and debited with the amount incurred by the assessee and the assessee has also not provided detail of employee cost of Rs. 55.36 crores, in view of this it cannot be said that the employee cost of Rs. 55.36 Crores of expenses are included under the head of Other Expenses in schedule 19. Thus we are sending back the file to the ld. TPO for fresh apportionment/distribution of the expenses among the segments of the assessee and re-calculate the margins. Accordingly, this ground of appeal is allowed for statistical purposes. Comparable selection - HELD THAT:- TPO is directed to exclude the company Tech Mahindra Business Services Ltd., Infosys Business Services Ltd. and SPI Technologies India Pvt. Ltd. from the final set of comparables. In the result, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer ( learned AO ), learned Transfer Pricing Officer ( learned TPO )and the Honourable Dispute Resolution Panel ( Hon'ble DRP1') grossly erred in making an adjustment of INR 25,02,52,221/-which includes INR 22,45,36,880/- with respect to Information Technology enabled services ( ITES ) segment and INR 2,57,15,341/- with respect to interest on delayed receivables, under section 92CA of the Income-tax Act, 1961 ( the Act ). 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ( TP ) documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act 3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach. Segmental Computation 4. The learned AO/ learned TPO/ Hon'ble DRP has erred in laws and on facts in computing the operating segmental margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent comparable companies. 14. The learned AO/ learned TPO/ Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-a-vis the comparable companies. Contention on comparable companies ITES Segment 15. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not rejecting the following companies: a) Datamatics Business Solutions Ltd. b) Microland Ltd. c) Manipal Digital Systems Pvt. Ltd. d) Inteq BPO Services Pvt. Ltd. e) SPI Technologies India Pvt. Ltd. f) Vitae International Accounting Services Pvt. Ltd. g) Infosys BPO Ltd. h) CES Ltd. 16. The learned AO/ learned TPO/Hon'ble DRP has erred in computing the margin of the following companies: a) Sundaram Business Services Ltd. b) Vitae International Accounting Services Pvt. Ltd. c) Manipal Digital Systems Pvt. Ltd. 17. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not accepting the following companies as comparables: a) BNRUdyogLtd. b) R Systems International Ltd. c) Allsec Technologies Ltd. d) Cosmic Global Ltd. e) Digicall Telese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit of TDS and advance tax. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. Ground Nos.1 to 3 are general in nature, which do not require any adjudication. 3. Ground Nos.5 to 7 and ground No.20 are not pressed and dismissed as not pressed. 4. Ground Nos.22 23 are consequential in nature. 5. Brief facts of the case are that the assessee has filed its return of income on 30.11.2017 declaring total loss of Rs. 11,89,93,421/-. Subsequently, on 30.3.2018, the return was revised declaring the very loss and the book profit u/s 115JB of the Income-tax Act,1961 ['the Act' for short] was declared at Rs. 77,76,68,972/-. The return was processed u/s 143(1) of the Act and the case was selected under CASS for scrutiny and statutory notices were issued to the assessee. The assessee filed documents and from those documents, the AO observed that the case should be referred to the TPO as per the CBD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M Reimbursement received 2204,46,872/- Other method Trade receivable 15389,94,045 TNMM Advances 1287,36,578 Other method Trade payable *'*^ ^ 6154,27,949 TNMM Unbilled revenue 5195,18,878 TNMM Purchase consideration 28281,75,64 Other method Total 65679,04,937 72613,74,92 138292,79,86 5.2 The assessee also entered into domestic transactions with its AEs, which is as under: Domestic Transactions Particulars Receivables/Received Payables/Paid Method Engineering, services 775,13,225 TNMM Engineering services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . d) Companies whose IT EDS/ITeS is less than 75% of its total operating revenues were excluded. e) Companies who have more than 25% related party transactions were excluded. f) Companies who have export services income less than 75% of the sales were excluded. g) Companies/employee cost less than 25% of turnover were excluded. 5.7 The ld. TPO after applying the above filters from the 11 companies selected by the assessee as a comparable only 1 company named Tata Elxi Ltd. was selected. The ld. TPO after applying the above filter selected 12 companies as comparable companies and calculated median at 20.84%. The assessee filed objections for the comparables selected by the TPO and the TPO dealt the objections filed by the assessee. The ld. TPO in the final set of comparables selected 9 companies and calculated median at 20.44% and TNMM method was used. The ld. TPO made adjustment under the EDS(SWD) segment of Rs. 38,94,99,840/-. 5.8 Further, for the ITeS (Business Support Services) segment, the assessee had selected 11 comparables out of which, 3 were accepted by the TPO. The ld. TPO started fresh selection of the comparables and he chose 17 companies and calcula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils were asked in particular format i.e. amount raised in invoice, date of invoice, date of receipt, delay in number of days to which the assessee submitted on 26.1.2021 in the specified form. After considering the submissions he made, adjustment of Rs. 5,55,90,126/- and the ld. TPO passed order on 29.1.2021 and proposed adjustment as under: The delayed trade receivables is proposed to be computed on invoice basis. To calculate the delay, the Assessee (vide the show cause issued on 06.01.2021) was asked to furnish invoice wise details of all the trade receivables from AEs during the year. The following details were asked in a particular format: Amount raised in invoice, date of invoice, date of receipt, delay in no. of days. However, the Assessee submitted the required data in the format asked on 26.01.2021. 5.8 After receipt of the order passed u/s 92CA of the Act by the ld. TPO, the AO proceeded to completing the draft assessment order and he made adjustment as proposed by the TPO in the above paragraph. 5.9 The AO further noticed that the assessee has received dividend income of Rs. 6,08,29,372/- and claimed the same as exempt income. In this regard, the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as BSS segment. The ld. TPO wrongly allocated the employee cost without giving any reasons and he has accepted the employee cost as determined by the assessee for the ECS third party segment and allocated the balance employee cost to ECS AE segment and BSS segment based on revenue. 6.2 Further, the ld. TPO allocated the remaining operating expenses based on revenue among the 3 segments i.e. ECS third party, ESS AE BSS. The ld. TPO arbitrarily adopted the method of considering the employee cost as determined by the assessee for the ECS Third party segment (Rs. 10,611/- lakhs) and then allocated the remaining employee cost for the other segments based on revenue. This action of the TPO in accepting the actual cost for one segment but allocating the cost as per revenue for the other two segments is without any basis. 6.3 He further submitted that the DRP while accepting the plea of the assessee that the employee cost of the BSS segment was part of the 'other expenses' erred in directing the allocation of the balance to the other segments on the basis of revenue. The assessee submitted that the DRP ought to have accepted the segmental computation as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, the Panel is of the opinion that since the TPO has allocated the employee cost on the basis of revenue, he is directed to allocate the employee among the AE and non AE components of the ECS segment on the basis of revenue and is directed to accept the employee cost already reflected by the assessee in the BSS segment. After due verification. Objection raised is disposed off with these directions. 7.1 Further, on going through the profit loss account, we notice that financial statement of the assessee is as under: 7.2 Further on going through the schedule No.19 other expenses , we notice that there is sub-contracting expenses of Rs. 54.,23 crores, which are included under the head other expenses and employee benefit expenses is at schedule No.18, which is Rs. 363.17 crores. These are the identifiable expenses and as per the agreement and TP study, assessee is engaged in the sub- contract works also, therefore, these sub-contracting expenses should be apportioned between/among the relevant segments/departments. The assessee has himself accepted that Rs. 55.36 crores are towards employee cost for the business support service segments to which the ld. TPO has ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk associated with the provision of back office support services. The Appellant had selected Transaction Net Margin Method ( TNMM ) as the Most Appropriate Method ( MAM ) and had computed its margin at 15.01% on operating cost. 7.4 The Appellant carried out the search for uncontrolled comparable's which yielded a set of 11 comparable companies with 35 th and 65 th percentile range of the weighted average operating profit/total cost of the comparable companies of 1.55% : 12.58% and median of 5.76%. Since the profit margin of the Appellant at 15.01% on operating cost was above the median of 5.76%, the profit margin earned by the Appellant in the ITES segment was treated at arm's length. 7.5 AS PER TP ORDER: The TP Officer rejected the TP study and conducted fresh analysis. The TP Officer agreed with the Appellant that TNMM was to be applied as the MAM. The TP Officer thereafter applied certain filters and selected 13 comparable companies in software development segment which included 10 new companies as comparables, while 5 company selected by the Appellant were retained. The list of the final set of comparables selected by the TP Officer is provided in page 68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amarine Pigment Ltd. (seg) 34.41% S No. Company Name Average of 3 years (OP/OC) 12 SPI Technologies India Pvt Ltd. 36.95% 13 Inteq BPO Services Pvt Ltd. 39.51% 35 th Percentile 22.37% Median 24.37% 65 th Percentile 27.41% * the comparables at Sl.No.1, 2 and 5 are TP study comparables accepted by the TP Officer 7.7 The TP Officer did not grant any adjustment towards working capital. The TP Officer however re-computed the profit margin of the Appellant at 8.75% against the margin of 15.01% determined by the Appellant in the TP study. 7.8 The issue pertaining to re-computation of margins is discussed in detail under submissions for Ground No.4 (supra). 7.9 A summary of the international transaction, margin computed, and ALP determined is provided in the table below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Crystal Voxx Ltd Included Page 78 3 R Systems International Ltd Rejected Page 78 4 Allsec Technologies Ltd Rejected Page 78-79 5 Cosmic Global Ltd Rejected Page 79-80 6 Digicall Teleservices Pvt Ltd Rejected Page 80 7 Bhilwara Infotechnology Rejected Page 80-81 8 ISN Global Solutions Pvt Ltd Rejected Page 81 9 I Services India Pvt Ltd Rejected Page 81 7.12 The DRP directed the TP Officer to verify and recompute the margins of the following comparables: Sl. no. Comparable 1 Sundaram Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Total Operating Revenue (Rs) 76,48,00,000 Total Operating Expenses (Rs) 80,67,00,000 Operating Profit (Rs) (-)4, 19, 00,000OP/ OC (percent) (-)5.19 Median (percent) 17.53 Arm's length price 98,93,36,88 TP adjustment (Rs) 22,45,36,88 TP adjustment as per TP Order 10,97,69,84 Enhancement pursuant to DRP 11,47,67,04 7.15 SUBMISSIONS OF THE APPELLANT: The Appellant has filed a CHART as Annexure-2 containing the arguments against the comparables sought to be excluded. The Appellant submitted that the following companies fail the turnover filter of Rs. l cr. to Rs. 200 cr. and hence they deserve to be excluded from the final set: S No. Company Name Rs/Cr Turnover of the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on various cases that the upper turnover filter should be applied as per the turnover classification done in the case of BORQS Software Solutions Pvt. Ltd. (IT (TP)A No.310/Bang/2021. During the course of hearing, the ld. A.R. relied on the judgement of the coordinate bench of this Tribunal in the case of BORQS Software Solutions Pvt. Ltd. (IT (TP)A No.310/Bang/2021 and in the case of ANSR Global Corporation Pvt. Ltd. (IT (TP)A No.225/Bang/2021 and the relevant part of the judgement in IT(TP)A No.310/Bang/2021 is as under: 11. As far as comparability of companies listed as (a) to (g) in Grd.No.8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee s turnover is only Rs. 24,71,71,242/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/Bang/2010, relying on Dun and Bradstreet s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.8.7 raised by the Assessee whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies. 9.2 Respectfully following the above judgement, we allow the ground raised by the assessee on this issue and the TPO is directed to exclude the company Tech Mahindra Business Services Ltd., Infosys Business Services Ltd. and SPI Technologies India Pvt. Ltd. from the final set of comparables. In the result, the ground raised by the assessee on this issue is allowed. Ground No.13 Working Capital Adjustment: 10. The assessee has raised this ground for not granting providing working capital adjustment while calculating the adjustment by the ld. TPO. In this regard, the ld. AR submitted that the working capital adjustment must be granted to the assessee and he relied on the following judgements: 1) Huawei Technologies India (P) Ltd. (2019) 101 taxmann.com 313 (Bang) 2) Altimetrix India Pvt. Ltd. (IT(TP)A No.477/Bang/2021. 11. The ld. D.R. relied on the order of the lower authorities and he submitted that during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrate such material differences so as to warrant an adjustment. In these circumstances, we are inclined to uphold the TPO s reasoning and reject the assessee s claim for working capital adjustment. 12. After hearing rival contentions and perusing the materials available on record we noted that the working capital adjustment is to be given and it is a mandatory requirement to allow adjustment if the assessee is able to provide the reasonable/accurate data of the comparable companies and in support of our decisions, we rely on the judgements cited by the ld. A.R. in the case of Huawei Technologies India (P) Ltd. cited supra in which it has been held as under:- 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this ground of appeal is allowed for statistical purposes. 13. In respect of ground Nos.15 17 the AR of the assessee submitted after re-computing the operating margins and applying turnover filter to exclude comparables as above and allowing working capital adjustment, the margins of the assessee would be at arm's length and hence, the arguments seeking exclusion and inclusion of remaining comparables in Ground No. 15 and 17 become academic. The Appellant however prayed that liberty may be reserved to contest the same at appropriate time. Considering the above, we grant liberty to the assessee to contest the remaining comparables in at appropriate circumstances. Accordingly, the ground Nos. 15 17 became academic in nature and it do not require for adjudication. Ground Nos.18 19: 13. The ld. A.R. relied on the written submissions 13.1 AS PER TP OFFICER (para 27page 70-83 of TP Order): The TP Officer treated the trade receivables as an international transaction and adopted notional interest rate of 14% being SBI PLR rate, without providing the method of computation of such rate to the Appellant (page 98 of TP order). The TP Officer therefore made adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ang/2018] wherein, the Tribunal has held as under: 24. We have heard both the parties and perused the material on record. The Id. AR fairly conceded that outstanding amount on account of sales/services billed to AE akin to loan advanced by assessee is an international transaction. As held by the Hon'ble Delhi High Court in the case of Avenue Asia Business Advisors (P.) Ltd. v. DCIT [2017] 398 ITR 120 (Del), there should be TP adjustment on this count after making proper TP study by the TPO after considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AEs for benchmarking the rate i of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by Id. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP. Emphasis supplied 14. The ld. DR. relied on the order of the lower authorities submitted that all the allegations raised by the AR of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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